Deal Burnout: Too Many Discounts?

NEW YORK ( MainStreet) -- When the hugely popular deal site Groupon announced it would go public earlier this year, many skeptics questioned whether high operating costs and the company's sometimes tenuous relationship with retailers would make the site's success short-lived.

The more fundamental threat to Groupon's business model and that of many other deal sites like it, however, may be something that once seemed unthinkable: Consumers could simply grow tired of all the bargains.

Having become a dime a dozen, half-off bargains may no longer be a real find.

After the recession hit in late 2007, dozens of daily deal sites launched, offering big discounts to the many consumers eagerly searching for ways to pinch pennies but still enjoy themselves. Suddenly, shoppers no longer had to rummage through multiple store circulars to find the right deal. Instead, these websites tailored offers to each shopper's interests and location and delivered these deals directly to their email inbox each morning.

While this formula has proved enticing enough for millions of subscribers to sign up for deal sites such as Groupon and LivingSocial in the years since, several shopping experts speculate that these consumers will begin to experience a kind of deal burnout, if they haven't already.

"There is definitely a risk of oversaturation with these daily deal programs," says Kit Yarrow, a professor of psychology and marketing at Golden Gate University who specializes in consumer psychology research. "Consumers can develop an increasing tolerance to that sense of the thrill of a bargain, and eventually it just stops being thrilling."

As Yarrow points out, many of the consumers she's spoken with get eight to 10 deal-related emails per day. These consumers watch as their inboxes are flooded with flight promotions from Travelzoo, restaurant deals from Yelp, flash sales on clothing from Gilt Groupe and the infinite number of half-off teeth whitening offers that seem to be pushed out from all deal sites simultaneously.

Each of these deals is billed as a "significant discount" available for a "limited time only," buzzwords that are often used by marketers to compel the consumer to make an impulse buy. Yet, it becomes increasingly difficult to convince consumers they need to make a purchase right then and there when they are offered countless limited-time bargains day after day, many of which resemble one another.

"That sense of urgency declines when you see the same deal on multiple sites or you notice each of the deal sites sends you the same kind of stuff over and over again," said Michelle Madhok, an online shopping expert and founder of SheFinds.com.

And it's not just the sense of urgency to make a purchase that changes, it's the level of expectation consumers have about what does and doesn't constitute a good deal.

"I think consumers are approaching a new normalcy for bargains where they have come to accept the bargain as being the standard price, reducing their impact," Yarrow said. "After all, if everything is always on sale, then the sale price becomes the new full price."

In short, deals that consumers once would have considered too good to be true may now be seen as too common to be good.

Too much of a good thingResearch on the impact of bombarding consumers with deals online is limited, since the phenomenon itself is relatively new.

One survey earlier this year from PriceGrabber.com found the majority of online shoppers (52%) confessed to being "overwhelmed" by the sheer number of daily deals they got, though this said nothing about whether that made them more or less likely to buy the deals. Likewise, an informal poll of more than 30 readers found that roughly half would jump to buy a random product only if it were discounted by 50% or more, perhaps hinting at the shift in deal expectations that has already occurred among consumers.

But the most telling study to date will likely come in the next couple months from Utpal Dholakia, a professor of management at Rice University, and his co-researcher Sheryl Kimes, a professor of operations management at Cornell's School of Hotel Administration. Dholakia has gained significant exposure in recent months for a series of studies about the effectiveness of daily deal sites from a business perspective, but his current research project analyzes how consumers respond to daily deal offers over time, with a focus primarily on restaurant deals.

Though the research is still in the beginning stages, Dholakia has noticed some striking trends from preliminary interviews with daily deal users.

"We definitely see a diminishment of interest and involvement with daily deals over time," Dholakia says. "When consumers first sign up for deals, they are enthusiastic and interested, they want to share the deal with friends and family, but in interviews we've done, we see people don't share their daily deal choices on Facebook and Twitter as much later on. It's a classic symptom that they are becoming less involved."

According to Dholakia, consumers start off eager to "explore" a deal site and build up their preferences, but gradually the promotions blur together, become too predictable and lose some of their luster.

One side effect, Dholakia says, is that consumers lose their interest in and loyalty to specific deal sites such as Groupon and turn more toward services that aggregate deals from multiple sites by category to better find the few deals that entice them.

What this means for businessesDaily deal sites weren't the first to apply the model of never-ending bargains, online or offline. Department stores such as Macy's ( M), Old Navy ( GPS) and Bath & Body Works ( LTD) have a sale sign in front seemingly every day of the week promoting the next big discount to passers-by. And no business plays the discount card more than Restaurant.com, which pushes 70% off restaurant deals constantly.

The growing number of deal sites whose entire business is staked on getting consumers to spontaneously buy discounted products has only exacerbated this phenomenon, exposing shoppers to exponentially more deals. Some argue that businesses may have an easier time prospering from this strategy online than they do offline.

"Even if customers do get desensitized to the deals they are exposed to on a daily basis, companies get so many consumer impressions on the Web that someone will end up buying the deals each day," said William Poundstone, author of Priceless: The Myth of Fair Value (and How to Take Advantage of It). In other words, since Groupon has some 83 million email subscribers and its deals are often seen by other nonsubscribers on the Web, there is a greater likelihood each of the deals will find a sizable number of consumers who just happen to be ready to buy it.

For that reason, it may not be hard for Groupon and others to maintain a bottom-line interest, but to thrive and grow the big challenge will be to rekindle some of the excitement and novelty around its deals that leads to more impulse buys.

"Companies have to at least create the perception that they are doing something differently," Dholakia said. "A key aspect of any price promotion is to keep it random, both in timing and in the depth of the discount. You never want to make a promotion predictable."

Dholakia argues that Groupon recognized the need to do this when it launched Groupon Now this year, a service that offers real-time discounts for restaurants and venues that can be redeemed only that day. Other deal sites such as LivingSocial have tested similar options.

While Dholakia praises this move as a step in the right direction, he argues the deal sites will have little choice but to keep changing and evolving.

"Companies have to mix it up, because people adapt," he said. "They need to constantly change what they are promoting and when they are promoting it. It's more work, but it will be more profitable and exciting to the consumer."